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Prologis Beats FFO Ests, Narrows Outlook

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Prologis Inc. (PLD - Free Report) delivered a positive earnings surprise of about 7.9% for the second quarter of 2013. The industrial real estate investment trust (REIT) reported core FFO (funds from operations) per share of 41 cents, beating the Zacks Consensus Estimate of 38 cents. However, it fell short of the prior-year quarter figure by 2 cents.

Results primarily reflect a decent reduction in expenses, though the benefit was partly offset by a fall in revenues. Yet, the company’s strategic measures and capital market moves have helped enhance flexibility, extend maturities and lower interest expenses.

Quarter in Detail

Total revenue during the reported quarter was $419.5 million, down 16.3% from the prior-year quarter and well below the Zacks Consensus Estimate of $440 million. Prologis leased 36.3 million square feet of space in its combined operating and development portfolios.

Total occupancy in the operating portfolio was 93.7% at quarter-end, unchanged sequentially. Tenant retention was 84.6% while GAAP rental rates on leases signed climbed 4.0% from prior rents, versus a decline of 3.8% in the comparable prior-year period.

Same-store net operating income (NOI) moved up 0.7% (down 0.4% on an adjusted cash basis). Notably, the company’s rents on rollover increased 4.0% in the quarter.

Notable Activities During 2Q

Development starts amounted to $385.3 million. Of this, Prologis' share was $301.4 million and projected share of value creation upon stabilization was $42.7 million. Total acquisitions of buildings and land worth $127.2 million were made. Of these, Prologis' share was $85.6 million. Moreover, investments worth $409.7 million in its co-investment ventures were made during the reported quarter.

Prologis' global development pipeline comprised 26.6 million square feet at quarter end, with total expected investment of $2.3 billion. Of this, Prologis' share was $1.8 billion. Moreover, the company accomplished $567.2 million in contributions and dispositions in the reported quarter, of which $347.7 million was Prologis' share.

The company continued to streamline its co-investment ventures through rationalization of two funds in the reported quarter. At the end of the quarter, Prologis had $22.8 billion in combined assets under management in 15 funds.


At quarter-end, Prologis had cash and cash equivalents of $385.4 million, substantially down from $785.4 million as of the prior-quarter end. On the other hand, total debt decreased to $8.4 billion from $9.1 billion recorded at the prior-quarter end.

It has been quite an active quarter for Prologis in terms of capital market activity. The company closed approximately $4.3 billion in capital markets deals and established an at-the-market equity offering program for vending up to $750 million of its common stock.

Following the quarter end, Prologis recast and increased its global line of credit. The credit line was upsized by $350 million to $2.0 billion and the move helped extend the initial term to 2017 as well as lower its interest rate by 40 basis points. The move gave the company the much required financial flexibility to pursue its growth initiatives.

Narrows Outlook

For full-year 2013, Prologis narrowed its core FFO guidance to $1.63 to $1.67 per share from the prior range of $1.60 to $1.70 per share. Alongside, the company raised its full-year deployment outlook. It increased the range by $1.7 billion to $3.5 billion – $4.1 billion.
Our Take

While better-than-expected results at Prologis is encouraging, we believe that a revenue miss is not appreciable. However, we believe that with a larger customer base, rise in e-Commerce application and supply chain consolidation, there is an increasing demand for Class-A facilities and Prologis stands to benefit as it has the capacity to offer modern distribution facilities in strategic infill locations. Also, the company’s effort to increase its dominance in the industrial real estate market of Europe is impressive.

Yet, with sluggish economic growth, we are not overtly optimistic on this Zacks Rank #3 (Hold) stock and believe that the risk/reward profile is currently balanced. Market vacancy increases may reduce its ability to push through rental-rate increases. Also, rising interest rates could increase its cost of financing.

We look forward to the results of other REITs that are scheduled to release second quarter 2013 results this week. These include CBRE Group Inc. and Taubman Centers Inc. (TCO - Free Report) and Ventas Inc. (VTR - Free Report) .

Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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